ISSN: 2056-3736 (Online Version) | 2056-3728 (Print Version)


Treasury bonds strengthened for a second straight session on Thursday as the Federal Reserve signaled it would take its time in raising interest rates. The price gains were contained by a report showing the manufacturing outlook in the mid-Atlantic region brightened. A $7 billion sale of 30-year Treasury inflation-protected securities is due at 1 p.m. Thursday.

In recent trade, the benchmark 10-year note was 5/32 higher, yielding 2.595%, according to Tradeweb. Bond yields fall when their prices rise.

The two-year note was 2/32 higher, yielding 0.448%. The yield has dropped from the highest level since September hit earlier this week.

Fed Chairwoman Janet Yellen reiterated Wednesday that the central bank expects to keep interest rates near zero for a considerable time, even after it winds down its bond-buying program by the end of this year.

“The lack of immediate concern around inflationary pressures from the Fed sets the stage for bond prices to move higher,” said Sean Simko, head of fixed-income management at SEI Investments in Oaks, Penn., which has $209 billion in assets under management.

Major central banks slashed interest rates to ultralow levels following the 2008 financial crisis. The European Central Bank even cut one of its interest rates below zero earlier this month aiming to encourage banks to lend cash to consumers and businesses to spur the euro zone’s economic growth.

“You have those two key central banks” committed to keeping rates low and “that should mean lower yields and lower volatility,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer in New York at the United Nations Federal Credit Union.

Asian investors, including those from Japan, have scooped up Treasury bonds amid the bond market’s latest strength, traders said.

Treasury bonds offer superior yields compared with their counterparts in Japan and Germany, which has been one of the main factors sending Treasury yields lower this year. The 10-year Japanese government bond yielded 0.584% Thursday and the 10-year German government bond yielded 1.326%.

Japanese investors have increased their foreign bond holdings, including Treasurys, by about $40 billion over the last eight weeks, said David Ader, head of government bond strategy at CRT Capital Group LLC.

Mr. Ader said the data, along with evidence of other Asian buying, “is quite a statement and stands in contrast to the generally more bearish views on the part of U.S. players.”

The 10-year yield has tumbled from 3% at the start of the year, its price boosted by the uneven pace of global economic growth, geopolitical risk in some developing countries and a record-low interest-rate policy from major central banks.

Strategists from big U.S. banks still stick to the view that the 10-year Treasury yield will rise to 3% or higher by the end of December. They have consistently argued that bond yields eventually will rise as the U.S. economy gathers steam and inflation pressures strengthen.

Some investors caution that the Fed may raise interest rates sooner than many investors expect if the pace of growth accelerates faster than the Fed anticipates. This would spark selling in Treasury bonds, especially short-dated notes.

“At some point, if the economy picks up, then rates will have to rise,” said Mark Dowding, senior fixed-income manager at BlueBay Asset Management in London, which oversees about $64 billion. “I still don’t like Treasurys at this point.”

For now, the consensus among bond investors and strategists is that the Fed would wait until at least the middle of 2015 before raising interest rates.

By Min Zeng